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- 1. PowerPoint Authors: Susan CoomerGalbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 by McGraw-Hill Education. All rights reserved. Flexible Budgets and Performance Analysis Chapter 9
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- 3. 9-3 Learning Objective 1 Preparea flexible budget.
- 4. 9-4 Characteristics of FlexibleBudgets Planning budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static planning budgets with actual costs is like comparing apples and oranges.
- 5. 9-5 Improve performance evaluation. Maybe prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Help managers control costs. Let’s look at Larry’s Lawn Service. Characteristics of Flexible Budgets
- 6. 9-6 Larry’s Lawn Serviceprovides lawn care in a planned community where all lawns are approximately the same size. At the end of May, Larry prepared his June budget based on mowing 500 lawns. Since all of the lawns are similar in size, Larry felt that the number of lawns mowed in a month would be the best way to measure overall activity for his business. Larry’s Budget Deficiencies of the Static Planning Budget
- 7. 9-7 Deficiencies of theStatic Planning Budget Larry’s Planning Budget
- 8. 9-8 Deficiencies of theStatic Planning Budget Larry’s Actual Results
- 9. 9-9 Deficiencies of theStatic Planning Budget Larry’s Actual Results Compared with the Planning Budget
- 10. 9-10 Deficiencies of theStatic Planning Budget Larry’s Actual Results Compared with the Planning Budget F = Favorable variance that occurs when actual costs are less than budgeted costs. U = Unfavorable variance that occurs when actual costs are greater than budgeted costs. F = Favorable variance that occurs when actual revenue is greater than budgeted revenue.
- 11. 9-11 Deficiencies of theStatic Planning Budget Larry’s Actual Results Compared with the Planning Budget Since these variances are unfavorable, has Larry done a poor job controlling costs? Since these variances are favorable, has Larry done a good job controlling costs?
- 12. 9-12 I don’t thinkI can answer the questions using a static budget. Actual activity is above planned activity. So, shouldn’t the variable costs be higher if actual activity is higher? Deficiencies of the Static Planning Budget
- 13. 9-13 The relevantquestion is . . . “How much of the cost variances are due to higher activity and how much are due to cost control?” To answer the question, we must the budget to the actual level of activity. Deficiencies of the Static Planning Budget
- 14. 9-14 How a FlexibleBudget Works To a budget, we need to know that: ▫ Total variable costs change in direct proportion to changes in activity. ▫ Total fixed costs remain unchanged within the relevant range. Fixed
- 15. 9-15 Let’s prepare a budget forLarry’s Lawn Service. How a Flexible Budget Works
- 16. 9-16 Preparing a FlexibleBudget Larry’s Flexible Budget
- 17. 9-17 Quick Check Whatshould the total wages and salaries cost be in a flexible budget for 600 lawns? a. $18,000. b. $20,000. c. $23,000. d. $25,000.
- 18. 9-18 Quick Check Whatshould be the total wages and salaries cost in a flexible budget for 600 lawns? a. $18,000 b. $20,000. c. $23,000. d. $25,000. Total wages and salaries cost = $5,000 + ($30 per lawn 600 lawns) $5,000 + $18,000 = $23,000 What should the total wages and salaries cost be in a flexible budget for 600 lawns? a. $18,000. b. $20,000. c. $23,000. d. $25,000.
- 19. 9-19 Learning Objective 2 Preparea report showing activity variances.
- 20. 9-20 Activity Variances Flexible budget revenues andexpenses Planning budget revenues and expenses The differences between the budget amounts are called activity variances.
- 21. 9-21 Let’s use budgeting conceptsto compute activity variances for Larry’s Lawn Service. Activity Variances
- 22. 9-22 Activity Variances Larry’s FlexibleBudget Compared with the Planning Budget
- 23. 9-23 Activity Variances Larry’s FlexibleBudget Compared with the Planning Budget Activity and revenue increase by 10 percent, but net operating income increases by more than 10 percent due to the presence of fixed costs.
- 24. 9-24 Learning Objective 3 Preparea report showing revenue and spending variances.
- 25. 9-25 Revenue and SpendingVariances Actual revenue Flexible budget revenue The difference is a revenue variance. Actual cost Flexible budget cost The difference is a spending variance.
- 26. 9-26 Now, let’s usebudgeting concepts to compute revenue and spending variances for Larry’s Lawn Service. Revenue and Spending Variances
- 27. 9-27 Revenue and SpendingVariances Larry’s Flexible Budget Compared with the Actual Results $1,750 favorable revenue variance
- 28. 9-28 Larry’s Flexible BudgetCompared with the Actual Results Revenue and Spending Variances Spending variances
- 29. 9-29 Learning Objective 4 Preparea performance report that combines activity variances and revenue and spending variances.
- 30. 9-30 Now, let’s usebudgeting concepts to combine the revenue and spending variances reports for Larry’s Lawn Service. A Performance Report Combining Activity and Revenue and Spending Variances
- 31. 9-31 A Performance ReportCombining Activity and Revenue and Spending Variances
- 32. 9-32 A Performance ReportCombining Activity and Revenue and Spending Variances 50 lawns × $75 per lawn 50 lawns × $30 per lawn
- 33. 9-33 $43,000 actual -$41,250 budget A Performance Report Combining Activity and Revenue and Spending Variances
- 34. 9-34 Performance Reports inNon-Profit Organizations Non-profit organizations may receive funding from sources other than the sale of goods and services, so revenues may consist of both fixed and variable elements. Universities Tuition and fees Donations State funding Endowments
- 35. 9-35 Performance Reports inCost Centers Performance reports are often prepared for cost centers. These reports should be prepared using the same principles discussed so far, except for the fact that these reports will not contain revenue or net operating income variances.
- 36. 9-36 Learning Objective 5 Preparea flexible budget with more than one cost driver.
- 37. 9-37 More than onecost driver may be needed to adequately explain all of the costs in an organization. The cost formulas used to prepare a flexible budget can be adjusted to recognize multiple cost drivers. Flexible Budgets with Multiple Cost Drivers
- 38. 9-38 Because the timerequired for edging and trimming is different for different lawns, Larry decided to add an additional cost driver (hours) for the time required for edging and trimming. So Larry estimated the additional hours and developed a new flexible budget that includes the second cost driver in both his revenue and expense budget formulas. Larry’s New Budget Flexible Budgets with Multiple Cost Drivers
- 39. 9-39 Flexible Budgets withMultiple Cost Drivers Larry’s Budget Based on More than One Cost Driver
- 40. 9-40 Learning Objective 6 Understandcommon errors made in preparing performance reports based on budgets and actual results.
- 41. 9-41 Some Common Errors Themost common errors when preparing performance reports are to implicitly assume that: 1. All costs are fixed, or that; 2. All costs are variable. Assume all costs are fixed.
- 42. 9-42 Common Error 1:Assuming All Costs Are Fixed Faulty Analysis Comparing Budgeted Amounts to Actual Amounts
- 43. 9-43 Common Error 2:Assuming All Costs Are Variable Faulty Analysis that Assumes All Budget Items Are Variable
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